Contracting for performance: restructuring the private prison market.

• Author: Kyle, Peter H.

TABLE OF CONTENTS INTRODUCTION I. PRIVATIZATION OF PRISONS IN THE UNITED STATES A. Getting Tough on Crime: Determinate Sentencing and the Prison Bubble B. Market Concentration C. Looking Forward in the Industry II. REBALANCING COST SAVINGS AND QUALITY IMPROVEMENTS A. Cost Minimization and the Current Incentive Structure B. Criticism C. Insufficiency of Increased Input Measures D. Normative Concerns E. Restructuring the Market III. DEMYSTIFYING THE PRIVATE SECTOR'S INFLUENCE ON SENTENCING A. The Impact of Proincarceration Lobbying B. The Normatively Problematic Capacity to Influence Punishment IV. CONTRACTING FOR PERFORMANCE: REFORMULATING THE MARKET THROUGH CONTRACT A. The Advantages of Outcome-Oriented, Performance-Based Measurements B. Graduated Bonus System CONCLUSION INTRODUCTION

Since the burgeoning of the private prison industry in the 1980s, the practice of contracting correctional services to private companies has received sharp criticism for incentivizing corporate advocacy of harsher crime policy and ensuring cost minimization at the expense of the prisoners' safety and capacity for rehabilitation. Many scholars have recoiled at the practice of privatizing the government's capacity to restrict the liberty of its citizens. (1) Yet in the literature's response to the wave of prison privatization that has characterized recent decades, these scholars have failed to offer substantive solutions beyond simply abolishing the practice. While discussing the premise of his recent book, That Used to Be Us, (2) Thomas Friedman observed that the incentives of contemporary politics are misaligned with the will of the people and eloquently captured the need for reform: "Move the cheese; move the mouse. Don't move the cheese; mouse doesn't move." (3) This blunt but sage observation reflects the economic axiom that "people respond to incentives" (4) that policy analysts and scholars of all hats too often overlook. (5) In the extensive literature on prison privatization, critics clearly recognize the perverse incentive structures the private prison industry creates but nevertheless fail to move the cheese, (6) instead proposing simply to kill the mouse. (7) This Note serves as an attempt to begin filling this gap in the literature by establishing a theoretical and practical

framework for restructuring the private prison market and the incentives corrections companies face.

Proponents of the abolition of privatization, (8) in their haste to oppose the practice, ignore the reality that the private sector, when confronted with the right incentives in a properly conceived market, has the unique potential to improve the rehabilitative capacity of the corrections system. Currently, the language of prison contracts defines the service provided as the provision of prison beds. (9) The concomitant incentive structure created promotes a focus on cost minimization of this service and serves as the foundation of the seemingly unavoidable challenges posed by prison privatization. The private prison market and the service provided by prison companies, however, need not be structured in such narrow terms. In order to reformulate the market and in turn the incentives created, contracting agencies should use performance-based measurements --such as comparative recidivism and employment rates--that would begin to redefine the market as that for rehabilitated prisoners and reformulate the operational philosophy of prison corporations. Although the contours of this system would initially be difficult to define, the ultimate impact of incentivizing cost-efficient rehabilitation and capturing the innovative capacity of the free market to respond to the nation's prison crisis would prove invaluable.

Part I of this Note begins by providing context to the prison privatization debate. Parts II and III respectively continue by grouping the extensive criticism of prison privatization into two categorical deficiencies--the emphasis on cost minimization over quality improvements and the encroachment of the profit motive into sentencing policy and practice. Treating these topics in turn, this Note highlights the utility of reconceptualizing the private market as that for the rehabilitation of inmates rather than simply the provision of prison beds. In order to effect this paradigm shift, Part IV proposes the utilization of a graduated bonus system that evaluates recidivism and employment rates in order to incentivize innovative methods of preparing inmates to return to society.

1. PRIVATIZATION OF PRISONS IN THE UNITED STATES

   1. Getting Tough on Crime: Determinate Sentencing and the Prison Bubble

      Beginning most prominently with Richard Nixon in his 1968 presidential campaign, political candidates across the nation have used crime as a campaign platform, promising tougher measures for fighting crime. (10) The emergence of crime as a political tool accompanied a shift in the operational philosophy of corrections from rehabilitation to incapacitation. (11) This resulted in a wave of determinate sentencing legislation that mandated longer sentences for offenders. (12) The increase in sentence lengths in turn led to an increase in the prison population. By 1986, thirty-eight states were either full or above capacity, and seven states exceeded capacity by more than 50 percent. (13) Courts subsequently began ordering states to reduce overcrowding, (14) further augmenting the dramatic increase in demand for prison beds. In view of this sharp increase in demand, private firms with experience managing detainment facilities began to perceive the potential profitability of providing prison services. (15) The Corrections Corporation of America, a Nashville-based firm, was the first to enter the market in 1985 (16) and other companies soon followed. (17)

      State governments found private prisons attractive primarily because of the reduced cost of operations, faster build times, and politically expedient financing. (18) Due to budget, capital, and labor constraints in the public sector, the private sector can build prisons faster and operate them at a lower cost than government prisons. (19) The Corrections Corporation of America, for example, can build a prison in nine months and have it operational within twelve, whereas a similar government facility would require a three-year window. (20) From a management perspective, private prisons boast the benefit of reduced costs, primarily derived from the use of nonunion labor. (21) Because labor represents two-thirds of the operating cost of prisons, private prisons achieve significant savings by avoiding the wage premium imposed by prison guard unions on public prisons. (22)

      In addition to the speed and reduced cost of private prison operations, many governments facing debt restrictions were attracted to the lease-payment bond mode of financing, which allowed legislators to circumvent public scrutiny and disapproval of increased expenditure on prisons by incorporating the financing of new prisons into the operating budget rather than the capital improvements budget. (23) Private companies would issue bonds to fund the construction of new prisons and then lease the bonds to the state, which in turn paid for the bonds through its operating budget. (24) Although the taxpayer remains liable for the cost in this scenario, policymakers evade the political fallout of raising taxes for the express purpose of funding prison construction.

   2. Market Concentration

      As a result of the confluence of interests supporting prison privatization, the private prison industry grew swiftly from its infancy in the 1990s. In 1990, there were 44 private prisons in the United States housing approximately 15,000 inmates. (25) By 2000, there were 264 private prisons, representing 16 percent of all prison facilities, (26) and, by 2005, the number of private facilities increased to 415, or 23 percent of all penal institutions. (27) Of these facilities, approximately two-thirds were under contract with state governments and one-third were under contract with the Federal Bureau of Prisons. (28) In 2009, nearly half of all new inmates were sent to private prisons, and private prison beds constituted almost 9 percent of the market. (29) The market is even further concentrated in particular states, as the proportion of prisoners held in private facilities varies widely from state to state. In 2006, nine states held 20 percent or more of their prisoners in private prisons. (30) Conversely, nineteen states did not utilize private prison facilities at all. (31)

   3. Looking Forward in the Industry

      Although the private prison industry experienced steady growth into the twenty-first century, many states and policymakers facing increasingly severe budget constraints are beginning to look for ways to minimize the costs of incarceration in the wake of the recent economic downturn. (32) Some states are once again starting to recognize the cost-savings potential of rehabilitative corrections and indeterminate sentencing. (33) Along with and in part because of this trend, the state prison population declined in 2009 for the first time in over a decade. (34) Yet as the Corrections Corporation of America and the GEO Group both acknowledge, and as independent market analysis suggests, the decline of determinate sentencing measures and the concomitant shrinking of the prison population represent the greatest threat to the viability of the private prison industry. (35) Therefore, as the pendulum swings back to a more cost-effective use of indeterminate sentencing and focus on rehabilitation, private prison companies will have to adapt to changing market conditions. The private sector, however, has the unique capacity not only to adapt to the changing market but also to thrive by facilitating the effective and innovative implementation of a rehabilitative corrections framework. (36) In harnessing this capacity through the contractual mechanism outlined below...